Emerging-Market Bond Funds Suffer in August

August proved another rough month for emerging-market bond funds, as their returns slid into negative territory and investors continued to withdraw at a rapid clip.

Emerging-market bond and equity funds have been pummeled since late May, when Federal Reserve Chairman Ben Bernanke signaled the Fed could trim its bond-buying later this year. Positive reports on the U.S. economy in recent weeks have heightened expectations that the Fed will, in fact, dial down its stimulus as soon as this month, and kept the emerging-market selloff going.

Emerging-market bond funds, for instance, have seen 14 straight weeks of outflows, with investors withdrawing $4.56 billion in August alone, according to EPFR Global. Over the past month, returns from these funds are down 3.56%. For the year so far, they have dived more than 10%, according to Morningstar.

Funds have been suffering in part because of the precipitous declines in emerging-market currencies, which have been dragged down by worries about the Fed as well as geopolitical tensions surrounding Syria. The MSCI Emerging Markets (USD) Currency index fell 1.3% in August. The Turkish lira and Indian rupee hit record lows against the dollar last month, while the Brazilian real and Indonesian rupiah both hit four-year lows.

Such slides have driven down the return on bonds denominated in emerging-market currencies, also known as local currency bonds. The-worst performing emerging-market bond funds in August were by-and-large those focused on local currency debt. For instance, the Ashmore Emerging Markets Local Currency Bond fund (ELBCX) and the HSBC Emerging Markets Local Debt fund (HBMAX) both fell 5.36% over the last month, sharing the lowest ranking for performance in August, according to Morningstar.

Funds focused on debt denominated in the China’s currency, however, dominated the asset class in August. The only emerging-market bond funds with positive returns in August were the HSBC RMB Fixed Income Fund and the Guinness Atkinson Renminbi Yuan & Bond Fund, returning about 1% and 0.6%, respectively, for the month.

These funds’ holdings are benefiting from Chinese policy makers’ plans to gradually make the tightly controlled yuan stronger as part of promised economic overhauls.